1. You focus too much on the monthly payment.
Obtaining a mortgage with a monthly payment that is within your budget is a very important part to choosing a good home loan. However, fixating on that monthly payment too much can lead you to pay tens of thousands more over the life of your loan.
For example, a $150,000 mortgage with a fixed 30-year terms at a 4.25% interest rate will run you $738 per month. However, over the life of the loan, you’ll pay $115,000 in interest payments alone. That means that when all is said and done, you’ll be paying almost $266,000 for your $150,000 home.
Let’s look a little closer and see if lowering your mortgage term could help you save. Since shorter mortgage terms have lower interest rates in most cases, let’s say the rate on this 20-year mortgage would be 3.925%. The monthly payments on this loan would be $902– just $164 more than the 30-year loan. However, over the life of the loan, you’d pay only about $66,000 in interest, making the total amount you’d pay for the home just over $216,000. That means that over the life of the mortgage, you’d save over $50,000 in interest.
Want to see how much you’d save? Check out our mortgage comparison calculator tool. The results are likely to surprise you.
2. You don’t think about your down payment amount.
The next of the common mistakes when buying a home has to do with down payment. Many people buy homes without giving much consideration to the down payment amount. Many strive for the minimum so that they keep a nice nest egg in the bank, but many others put down as much as possible with the goals of paying off their mortgage faster or having lower monthly payments.
The right down payment for you is the largest one you can comfortably provide without digging into your cash reserves that will serve as your safety net. After all, putting all of your money into your down payment won’t do you any good if an emergency happens a few months or years after you move in and you haven’t been able to replenish your reserves. Make sure you leave enough money in your savings accounts for at least three, but ideally six, months of living expenses in the event of a job loss or other financial catastrophe. You don’t want to live on the edge, because at the end of the day, if you can’t make your mortgage payment if a disaster strikes, the last thing you’d want is to lose the investment that you worked so hard to obtain.
That having been said, putting too little down can also be problematic. Both FHA and conventional loans require mortgage insurance, which will add to the monthly cost of your mortgage. Conventional loans allow homeowners to drop their mortgage insurance after they achieve 80% loan-to-value in their homes, but in some cases, FHA loans do not.
3. You don’t consider your long term objectives when choosing a term.
Another common mistake homebuyers often make is not considering their long term life goals when taking out a mortgage. 30 years is a long time to pay on a mortgage– as is 10, 15, or even 25 years. However, if you’ve got plans to retire and you’re buying a home later in life, a 30-year loan probably isn’t your best bet. After all, if you’re buying a home in your 40s, do you really want to be paying for it into your 70s? Consider your long term financial goals before buying. These will include things like home improvements, retirement, children going to college, paying off credit card debt to put yourself in a better financial situation, and even things like being able to afford to travel.
Think about how your mortgage term will play a role in those plans. Do you want to travel the world in your 50s? Do you have young children for which you want to be able to afford high quality university educations? Do you plan to move again? Do you want to upsize later? Downsize? Do you want to make major home renovations? All of these things should be considered when you decide on a mortgage term.
We already know that shorter mortgage terms save money in the long term, but there are definitely other benefits to owning your home outright faster as well. After all, it’s your life– and you should be able to live it in the way you see fit.
For more information on how to use your mortgage as a tool to empower your financial future, contact an NLC Loans personal mortgage advisor with zero obligation today.